To Stimulate The Economy, Liberate It

While some in Washington are quibbling about the details of the economic stimulus package, nearly everyone agrees with its basic idea: that our ailing economy needs Uncle Sam to play doctor and hand out some $150 billion in consumer spending money. But this sort of government intervention is not the cure for our economic troubles. It is the cause.

To understand why, we must first recognize that the key economic activity that causes growth is not consumer spending but production.

Economic growth means an increase in the amount of wealth that exists in a country–and all wealth must be produced. Houses, health care, air-conditioning and transportation do not come ready-made from nature. We have them only to the extent that individuals and businesses bring them into existence.

The focus of today’s stimulus packages on consumer spending is therefore completely backward. Consumption is a consequence of production. This fact is ignored by the Bush plan, which attempts to achieve prosperity through $100 billion in deficit-spending. Though this might bring the appearance of prosperity, in the same way that an unemployed man appears prosperous if he goes on a shopping spree with his credit cards, the reality will be the opposite.

The fact is that consumer spending is slowing because production is slowing. There have been massive misallocations of capital–witness, for instance, the housing market–which are now coming home to roost. The resulting financial losses, economic uncertainty and more tenuous job market are all contributing to the American consumer’s inability or unwillingness to spend.

If the Bush spending plan can’t productively stimulate the economy, what government economic plan can? None. Production does not need stimulation from the government; it needs liberation from the government. What a productive, dynamic economy requires of a government is that it restrict itself to protecting property rights from force and fraud, and refrain from interfering in free production and trade.

Now it is of course popular practice to blame economic problems, not on government intervention but on the free market. But observe that all of the most prominent problems today–problems with housing, financial markets, health care, oil–involve some of the least-free sectors of our economy, those with the most government intervention.

Consider the extent of government culpability in the current subprime meltdown. There is the Federal Reserve, which wrought havoc with the markets by manipulating interest rates, first setting them below the rate of inflation and then quintupling them.

The Fed’s initial policy convinced subprime borrowers that if they took out mortgages tied to Fed rates, they could afford homes that they ordinarily couldn’t. The Fed’s artificially low rates fueled a borrowing spree and housing bubble that were instrumental in the subprime meltdown. Then there is the network of entities backed by the government, like Fannie Mae and Freddie Mac , which were big champions of subprime lending and big propagandists for the idea that everyone needs to own a home to live the American Dream. Finally, there is the government’s long-standing policy of assuring large financial institutions that they are “too big to fail,” which encourages short-range, high-risk investments.

Given all these influences, is it any surprise that so many people with poor credit bought expensive homes, that so many financial institutions lent them the money and that all hell broke loose once the unsustainable could no longer be sustained? In an unhampered market, private lenders and borrowers don’t behave this way.

And this is just the tip of the iceberg of how our government today stifles economic productivity through its gargantuan regulatory and welfare state. Try to project the impact on productive businesses of the vast burden of federal and state regulations–regulations that render off-limits a huge range of productive endeavors.

For example: If a fast-growing software company needs to quickly import a dozen eager and talented Indian programmers, it can’t, thanks to our immigration laws. If a company needs to fire a group of incompetent employees to make its workforce more productive, it risks a million-dollar lawsuit. If a developer seeks to offer low-cost housing in the vast, unused tracts of land in expensive California districts, too bad–that would go against environmentalist “open space” laws.

If a health insurance company tries to win more customers with deductibles, coverage and limits that will make insurance far more affordable, the idea is sunk; states dictate the terms of health insurance contracts. If a group of venture capitalists want to invest in new nuclear power, to supply cheap energy to a new market, it cannot–environmental regulations have prevented any new plants for decades, despite the technology’s stellar safety record.

If the board of a struggling public company wants to hire a top-flight CEO to turn its company around, its job is much harder (and more expensive) thanks to the CEO-repelling climate created by Sarbanes-Oxley, whose vague laws and new criminal penalties make managing a firm much riskier. Even the simple project of building a larger facility to house a growing business can easily be held up for six months, while the owner must glad-hand zoning and permit bureaucrats.

And this is just the smallest indication of the regulatory strangulation that American businesses suffer. Imagine the economic stimulus, the explosion of productivity, that would occur if these regulatory nooses were removed.

For that matter, consider how our government wreaks economic destruction by taxing the wealth of the productive and diverting it unproductively. Americans pay trillions of dollars in taxes annually–the vast majority of which is not for the agencies that protect our rights (police, military and courts), but for regulations and for entitlement programs that transfer wealth from productive individuals who have earned it to those who haven’t.

Over the years, these programs have prevented individuals from investing trillions of dollars in new ventures. It took a million dollars to start Google ; if the government hadn’t drained us of millions of dollars, picture what other amazing technologies, products and services we would be enjoying today.

The economic stimulus that would result from drastically cutting government regulation and spending (and thus taxation) is almost unimaginable.

Faced with recession, therefore, we should be asking not, “What can the government do to stimulate the economy?” but “What can it stop doing?” Washington should be debating which disastrous programs to phase out first: Sarbanes-Oxley, or the constellation of agencies that distort the housing market, like Fannie Mae and Freddie Mac. Politicians should be committing to drastically cutting government spending, so that Americans can have real and lasting tax relief.

What our economy needs is not a stimulation package, but a liberation package.